Lawmakers and regulators are taking a red pencil to America's gospel of free capital markets with a vigor not seen in years as the Enron Corp. debacle, Sept. 11 attacks and a recession combine to set the stage for a new bout of financial reform.

From off-exchange derivatives trading and money laundering to 401(k) retirement plans and accounting disclosure, market referees are in a rule-making mood, experts said.

"Sometimes you need a spark to bring legislative change. That's been the story of our financial history," said Columbia University law professor Harvey Goldschmid, formerly general counsel at the Securities and Exchange Commission.

"The trick is to make sure that the change makes things better, not worse," he added.

The last major overhaul of financial market regulation came in November 1999 with the Gramm-Leach-Bliley Act. Passed during a raging bull market, the act boldly swept away barriers separating banks, brokerages and insurers.

Two years on, the tech bubble has burst, equities have drifted sideways for 22 months and the financial system has suffered within weeks the dual shocks of Sept. 11 and Enron.

In the process, a certain zeal for unfettered market forces that stamped the 1990s has grown muted, raising the question of whether the regulatory pendulum is swinging back in favor of intervention, despite the Republican White House.

"We'll have to see results before we know ... But people are not as enamored with the financial marketplace as they were a few years ago. There's a new realism," said Donald Langevoort, securities law professor at Georgetown University.

Some "know-your-customer" style rules aimed at preventing money laundering had been stymied for years by privacy activists and industry interests.

But that was before the Sept. 11 attacks on the World Trade Center and the Pentagon using hijacked planes by individuals who blended into regular society and received transfers of money from foreign backers. Investigators have also probed hedge funds amid worries that the lightly-regulated investment vehicles for the wealthy could be used to finance illegal activities.

Galvanized by the attacks, Congress swiftly passed legislation in October that brings brokerages, insurers and commodity traders under the sort of anti-money laundering rules faced by banks for years.

ENRON DRAWS TEARS, JEERS

"We're clearly in a market where people are not euphoric anymore, and are likely to get angry at events like these," said Langevoort.

Case in point is the collapse of Enron, a former pillar of the Fortune 100 that went, in mere weeks, from Wall Street darling to the largest bankruptcy filing in U.S. history.

At a Senate Commerce Committee hearing on Tuesday, Enron investors were in tears, while the company and its auditor, Big Five accounting firm Andersen, drew the wrath of lawmakers.

At least four congressional committees are investigating Enron, as are the SEC and the departments of Justice and Labor, ensuring that the affair will run well into 2002, providing fuel for would-be financial reformers.

Much has been made early on about whether the affair was a result of company misbehavior or systemic flaws. "I sense this really is a disclosure and cheating problem, rather than a financial system risk problem," Langevoort said.

Nevertheless, the legislative machine is already grinding out proposals, with some breathing new life into old ideas.

Some of the measures might have helped Enron workers whose 401(k) accounts were heavily invested in company shares. Enron stock has plunged from an August 2000 high of more than $90 a share to 43 cents on Wednesday on the New York Stock Exchange.

Democratic Senators Barbara Boxer, from California, and John Corzine, from New Jersey, Tuesday introduced a bill to limit the amount of any single stock that an employee can hold in a 401(k) to 20 percent.

Florida Democratic Senator Bill Nelson also said Tuesday he was considering legislation to protect 401(k) account holders' rights to sell shares when they want.

Accounting firms that audit corporate finances while working as consultants to the same companies -- as Andersen did for Enron -- "call into question whether shareholders can rely on earnings reports and other indicators of a company's health and its future stock price," said Pennsylvania Rep. Paul Kanjorksi, a top Democrat on the Financial Services Committee, during its Dec. 12 hearing on Enron and Andersen's audit work.

ACCOUNTING CRACKDOWN SEEN LIKELY

The most likely outcome of complaints like these, say lawyers and regulators, may be the SEC prodding accountants to do a better job of regulating themselves through groups such as the American Institute of Certified Public Accountants and its newly beefed-up whip-cracker, the Public Oversight Board.

"The accounting regulatory system is really quite good now. I see no reasons for reform. What I see is a need for the SEC to assert its attitudes about disclosure," said David Ruder, a law professor at Northwestern University in Chicago and formerly SEC chairman from 1987 to 1989.

Improved disclosure -- or the obligation of corporations to tell the world about their results and important news -- is high on the agenda of the new SEC chairman, Harvey Pitt.

He is campaigning for "real-time disclosure" and carrying on his predecessor Arthur Levitt's drive for plain-English accounting -- something that lawmakers said was plainly lacking in the footnotes that disclosed the byzantine outside partnerships at the root of Enron's troubles.

Better rules on how to account for such partnerships -- known as special-purpose entities, or SPEs -- can also be expected from the Financial Accounting Standards Board, with a shove from the SEC, lawmakers and lawyers said.

On a further front, stock analysts put in another poor display on Enron, with most keeping "buy" ratings on the stock even as it plummeted after mid-September, critics said.

"The analysts were recommending 'buys' and 'strong buys' even when Enron's stock valuation was going in the tank. You have to wonder what role they played," said Rep. Michael Oxley, the Ohio Republican who chairs House Financial Services.

The Enron episode looked likely to intensify demands from those who want stiffer standards for analysts, as well as for those hoping to rein in over-the-counter derivatives markets, especially in the energy sector where Enron was a lead player.

Spurred in part by Enron's nose-dive, the Federal Energy Regulatory Commission on Wednesday proposed new derivative and hedging reporting requirements for energy companies.